1) Purchase $20 mill bond, what are 2 ways you could hedge your position?
b) Purchase $20 mill bond, using government bond future contract to
hedge, Would you buy or sell the futures contract?
c) Is it better to purchase a bond on cum-interest or ex-interest
(assuming the yield is the same) ?
2) List 2 major differences between cross currency and single currency swaps
a) Identify 6 risks involved in entering swaps and suggest ways to
mitigate each risks?
3) Your new assistant comes in and comes to you and says the following:
"I've done some analysis on a new bond issue with 6.50% coupons
maturing on 15/9/09 which will yield at 5.80%. I've calculated the
duration of this bond to be 5.32. I think that altough the cash rate
will stay the same, it is likely that the 5 year part of the yield
will steepen by 100bp. Therefore we can expect the price the bond to
rise by 5.32%"
a) Without doing any calculations, find 6 problems in the statement?

here are some of the answers

1a) (assuming you want to hedge i risk) write a forward OR go short T futures
1b) short the futures
1c) if the YTM on the FULL purchase price is the same, cum-interest is
better. To make sure we understand each other, most bonds trade
cum-interest until immediately before the coupon date. However, the
buyer has to pay the seller for the accrued interest since the last
payment... this is effectively a "synthetic" ex-interest position.
2) single-currency swaps are really just interest rate swaps that
expose you only to i risk ; cross-currency swaps expose you to i risk
and E risk (ignoring factors that apply to both, like counterparty
risk)
3a) * the duration 5.32 exceeds the time to maturity (9 Sept 2009 is
~4.25 yrs away) * the 5 yr rate won't apply throughout the bond's
life... as it approaches maturity, shorter rates will matter * if
rates rise, bond price must fall